Message-ID: <30976589.1075856475976.JavaMail.evans@thyme> Date: Fri, 27 Oct 2000 10:11:00 -0700 (PDT) From: vince.kaminski@enron.com To: vkaminski@aol.com Subject: Hedge Effectiveness Test for Fair Value Hedges Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Vince J Kaminski X-To: vkaminski@aol.com X-cc: X-bcc: X-Folder: \Vincent_Kaminski_Jun2001_3\Notes Folders\Sent X-Origin: Kaminski-V X-FileName: vkamins.nsf ---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 10/27/2000 05:18 PM --------------------------- "Leslie Abreo" on 10/23/2000 04:06:12 PM To: "Roger Leworthy" , "Ron Baker" cc: "Vincent Kaminski" Subject: Hedge Effectiveness Test for Fair Value Hedges Gentlemen: We have had favorable responses regarding the use of our Volatility Reduction Method (Roger, I've attached a copy of our article in case you hadn't seen it). However, there continued to be a quibble about how to create the set of data points that would be inputs into the testing process. Last week the consulting arm of a "Big Five" accounting firm indicated that the following method proposed by us would be acceptable. We believe this method overcomes the statistical problems that arise from using interest rate differences from overlapping ("rolling") quarters. Method: 1)Calculate daily yield curve changes expressed as ratios, using historical rates from the most recent, say, two years. (Note: no overlap). This results in a set of around 494 vectors of ratios (approximately 247 trading days per year). Example: If the first three yield curves in the historical set look like this: 19980801 6.5 6.6 6.7 ......... 7.2 19980802 6.3 6.3 6.6 ......... 6.9 19980803 6.6 6.8 6.9 ......... 7.1 Then the change from 8/1/98 to 8/2/98 is: 6.3/6.5 6.3/6.6 6.6/6.7 .......... 6.9/7.1 And the change from 8/2/98 to 8/3/98 is: 6.6/6.3 6.8/6.3 6.9/6.6 ......... 7.1/6.9 2)Randomly select 62 of these "ratio" vectors (approx. 62 trading days in a quarter). 3)Multiply these ratio vectors together to get a single vector (ie, the 62 6mo ratios are multiplied together, the 62 1yr ratios are multiplied togeter, etc.). The result represents a single quarterly yield curve transformation. Apply it to "today's" yield curve. The resulting yield curve represents one simulated quarterly change in interest rates 4)Repeat steps 2 and 3 until an adequate number of yield curves are generated, say 100. 5) Proceed with testing process. I would be interested in your comments. Leslie Abreo Andrew Kalotay Associates, Inc. 61 Broadway, Ste 3025 New York NY 10006 Phone: (212) 482 0900 Fax: (212) 482 0529 email: leslie.abreo@kalotay.com Visit AKA's website at http://www.kalotay.com - FAS133 article.pdf